Author Topic: LILA - Liberty Global Latin America tracker  (Read 98857 times)

ni-co

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Re: LILA - Liberty Global Latin America tracker
« Reply #60 on: August 20, 2015, 06:32:11 AM »
It looks like we will get a big chance to load up on LILA. There are more and more signs of an EM crisis driven by the strong USD. There are very good reasons for worrying. Yet, this is exactly why Malone & Co. hedge the debt payments of LILA. I think there's going to be blind selling before market participants are going to recognize that there are hedged companies with strong balance sheets and the rest.


Yours Truly

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Re: LILA - Liberty Global Latin America tracker
« Reply #61 on: August 20, 2015, 06:45:14 AM »
I was fully anticipating a massive sell-off in this due to the sheer size ($1 billion vs LBTYA) and uncertainty of EM's.  I hope it has finally arrived.

muscleman

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Re: LILA - Liberty Global Latin America tracker
« Reply #62 on: August 20, 2015, 06:47:42 AM »
Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know?

they say they use hedges to minimize the impact of "foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity"

My understanding is that as a borrower you want to end up with debt payments in the same currency as your revenues / CFs.  You can achieve this by either converting your revenues earned in currency X to the currency of your borrowing currency Y.  Or you can convert your borrowings in Y into X.  You also want to know what those debt payments will be so you can plan your business.  Since you don't know the exchange rate in the future, you use currency hedges to achieve this.  But you only need to convert one - either revenues or debt payments to end up with the same currency for both. Since debt payments are more definite and known, it is easier to hedge debt payments than revenue (notional amount of the contract).

Why do you think hedging the OCF is difficult? This is a very stable business. Right now they have hedges to sell the USD.CLP pair that covers their debt service. They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it.

no_free_lunch

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Re: LILA - Liberty Global Latin America tracker
« Reply #63 on: August 20, 2015, 07:21:32 AM »
I would have assumed that spinoff dynamics (e.g. blind selling of the smaller company) wouldn't apply to a malone entity but perhaps I was wrong.   However, at the same time I wonder if it wasn't just priced too high.

frommi

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Re: LILA - Liberty Global Latin America tracker
« Reply #64 on: August 20, 2015, 07:27:47 AM »
They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it.

For 1 year, yes. And after that year?

muscleman

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Re: LILA - Liberty Global Latin America tracker
« Reply #65 on: August 20, 2015, 07:32:39 AM »
They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it.

For 1 year, yes. And after that year?

What do you mean? Are you saying that their OCF will decline sharply after 1 year?

frommi

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Re: LILA - Liberty Global Latin America tracker
« Reply #66 on: August 20, 2015, 07:53:42 AM »
What do you mean? Are you saying that their OCF will decline sharply after 1 year?

That depends on the currency rate after that year.

DeepSouth

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Re: LILA - Liberty Global Latin America tracker
« Reply #67 on: August 20, 2015, 08:01:30 AM »
Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know?

they say they use hedges to minimize the impact of "foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity"

My understanding is that as a borrower you want to end up with debt payments in the same currency as your revenues / CFs.  You can achieve this by either converting your revenues earned in currency X to the currency of your borrowing currency Y.  Or you can convert your borrowings in Y into X.  You also want to know what those debt payments will be so you can plan your business.  Since you don't know the exchange rate in the future, you use currency hedges to achieve this.  But you only need to convert one - either revenues or debt payments to end up with the same currency for both. Since debt payments are more definite and known, it is easier to hedge debt payments than revenue (notional amount of the contract).

Why do you think hedging the OCF is difficult? This is a very stable business. Right now they have hedges to sell the USD.CLP pair that covers their debt service. They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it.

Swapping OCF into USD increases financial risks to the firm (it's not hedging, it's speculation). What if CLP climbs 50% on the USD? You've just locked yourself into USD OCF but are now paying CapEx in 50% appreciated CLP, potentially putting you at solvency risk. These are just the 1st level effects of such a move; complex systems are harder to predict.

You are effectively suggesting the creation of a currency mismatch. You are free to do this against your security if you want to speculate on currencies, but it makes little sense to do it from management's standpoint IMO. I don't think JM would say this is where his skillset lies anyway.

Hedging the debt into CLP lowers risk by matching the currency of the assets to the currency of the liability.

I certainly may be misconstruing something, but this is how I see it.
« Last Edit: August 20, 2015, 08:04:38 AM by DeepSouth »

ni-co

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Re: LILA - Liberty Global Latin America tracker
« Reply #68 on: August 20, 2015, 08:25:34 AM »
I would have assumed that spinoff dynamics (e.g. blind selling of the smaller company) wouldn't apply to a malone entity but perhaps I was wrong.   However, at the same time I wonder if it wasn't just priced too high.

I think the recent sell-off has nothing to do with LILA. LILA is down with EEM 1:1. This is an EM sell-off and that's also why I expect it to continue.

BraveChieftain

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Re: LILA - Liberty Global Latin America tracker
« Reply #69 on: August 20, 2015, 09:11:28 AM »
Probably some incremental selling based on macro risk in Chile given what's going on with China/commodities. On another note, does anyone have a view on whether they'll be able to eventually bring their cost of financing lower? I think on a swapped basis, the VTR notes are at ~7% and LBTY has a weighted average ~5% cost of debt in Europe. Lilac definitely looks attractive on an EV/EBITDA basis, but if they have structurally higher financing costs, maybe this is deserved.